Fitch Affirms Dayton City School District, OH's GOs and COPs; Outlook to Stable
--\\$171.2 million series 2014 and series 2013A school facilities construction and improvement unlimited tax refunding bonds (underlying), at 'A';
--\\$5.5 million limited tax general obligation bonds (LTGO) series 2012 and series 2013B, at 'A';
--\\$13.7 million COPs series 2012, at 'BBB+'.
The Rating Outlook is revised to Stable from Negative.
SECURITY
The unlimited tax general obligation (ULTGO) bonds are voted general obligation debt of the district secured by an unlimited ad valorem tax levy outside the 10-mill limitation.
Additional security for the series 2014 and 2013A ULTGO refunding bonds is provided by the Ohio School District Credit Enhancement Program (rated 'AA'; Outlook Stable) which requires the Ohio Department of Education (ODE) to forward state foundation program payments to the bond registrar if, prior to the bond payment date, the district has not transmitted funds sufficient to cover required debt service payments.
The LTGO bonds are non-voted general obligation debt of the district secured by an ad valorem tax levy within the 10-mill limitation.
The COPs are secured by an obligation of the district to make rental payments under the lease subject to annual appropriation. The COPs are additionally secured by a leasehold interest for the benefit of certificate holders in the leased assets.
KEY RATING DRIVERS
OUTLOOK REVISION: The Rating Outlook revision to Stable from Negative reflects Fitch's expectation that while the district's reserves are thin, they should improve over the near term. Additionally, funds are available outside of the general fund that provides financial flexibility.
STATE AID INCREASES: The district will benefit from the state's biennial (2016-2017) budget with increased state funding that will alleviate projected budget pressures and the immediate need for a new tax levy.
STRONG VOTER SUPPORT: The bulk of locally-generated revenues are from continuous property tax levies which do not require periodic voter renewal, but the district likely will require a new voter-approved levy within the next four to five years. Support for new levies historically has been strong.
DIVERSE ECONOMY REMAINS PRESSURED: An improving, but still elevated unemployment rate, below average income levels and a stagnant tax base continue to pressure the local economy. The presence of Wright Air Force Base and a number of higher education institutions provide a measure of stability.
MANAGEABLE LONG-TERM LIABILITIES: Debt levels are expected to remain manageable given the lack of future borrowing plans and above-average debt amortization. Post-retirement benefit obligations are affordable.
COPS APPROPRIATION RISK: The 'BBB+' rating on the COPs reflects the annual appropriation risk inherent in the rental payments to be made by the district to the trustee.
RATING SENSITIVITIES
RESTORATION OF RESERVES: Inability to maintain budgetary balance and improve reserve levels in the medium term would put negative pressure on the rating.
CREDIT PROFILE
The district encompasses 49 square miles in Montgomery County, 68 miles west of Columbus, including Harrison and Jefferson townships and portions of the cities of Dayton, Riverside and Trotwood. The district serves approximately 13,791 students and has experienced significant declines in enrollment as a result of population outflow and competition from charter schools. Enrollment appears to be leveling off, as it decreased by less than 1% in the 2014-2015 school year and increased by about 2% for the 2015-2016 school year. The district's population of approximately 152,000 has declined by almost 16% since 2000 but has remained fairly stable since 2010.
WEAK GAAP PERFORMANCE/IMPROVED CASH BASIS
The district reported general fund operating deficits after transfers of \\$13.7 million (6.2% of spending) and \\$7.9 million (3.4% of spending) in fiscals 2013 and 2014, respectively. The deficits were primarily a result of lower property tax revenues than budgeted due to a revaluation, continued phase-out of tangible personal property taxes, and higher instructional costs due to the elimination of some grants. The unrestricted general fund balance at June 30, 2014 totalled a negative \\$3.8 million or negative 1.7% of spending. There are funds outside of the general fund that are available for liquidity.
The district recorded positive cash operations that should relate to improved GAAP results for 2015. GAAP-based results for 2015 comparable to prior fiscal years are not yet available. On an unaudited cash basis at fiscal year-end June 30, 2015, the general fund recorded a \\$7.6 million operating surplus and an ending unreserved cash balance of \\$11.2 million (4.9% of spending). This followed a cash basis \\$3.3 million operating deficit and a \\$4.8 million unreserved cash balance at June 30, 2014 (2.1% of spending).
STRONGER CASH PROJECTIONS
The May 2015 five-year cash forecast (revised to reflect June 30, 2015 results) is much improved from the May 2014 forecast with smaller deficits and negative cash balances later in the forecast than previously projected, primarily due to a projected increase in state aid and lower instruction and benefit costs.
The district is highly reliant on state funding which represents about 73% of general fund revenues. Under the state biennium budget for 2016-2017 the district will receive annual increases of about 6% or \\$10 million. The May 2015 forecast projects surpluses through 2017 followed by three years of deficits, increasing to \\$12.9 million (4.5% of spending) in 2020. Despite the expected deficits, thin but positive ending cash reserves are projected through 2019.
CONTINUOUS PROPERTY TAX LEVIES; STRONG VOTER SUPPORT
Property taxes represent approximately 26% of general fund revenues. Fitch believes the continuous nature of the district's property tax levies relieves some of the uncertainty about voter support that other districts in Ohio face. However, given the inability to capture any tax base growth in continuous levies, the district will continue to be dependent on voter support for new levies going forward. Support for new tax levies historically has been strong; the last levy was approved by 58% of the voters in 2008. A new tax levy will not be needed until 2019 or 2020 as a result of increased state funding combined with expense control. Notwithstanding, district management is being proactive regarding levy planning and is seriously contemplating going to the ballot in 2016 to take advantage of the Presidential election, which historically has proven successful for new levy approvals.
The tax base is diverse with the top 10 property tax payers accounting for 8.7% of assessed value. Property tax collections have improved but are still weak with a current collection rate of only 86%. Total collections are better but still sluggish at 94%.
DIVERSE ECONOMY; WEAK ECONMOIC INDICATORS PERSIST
The area's traditional manufacturing base in automobile parts and assembly was devastated by the recession, but is showing signs of recovery. The region has established itself as a hub for aerospace research and development, and Wright-Patterson Air Force base, which employs approximately 27,000 civilian and military personnel, provides stability to the local economy.
The city's unemployment rate remains elevated compared to state and national rates, but is improving. For June 2015 the city recorded an unemployment rate of 6.2%, an improvement from the 7.4% recorded in June 2014 but still above the state and national rates of 5.2% and 5.5%, respectively. Employment growth (1.8%) in 2014 was positive and comparable to state and national averages while the city's labor force declined by 1.0%.
Income levels as measured by per capita money income and median household income are well below state and U.S. averages. Typical of urban areas, the poverty level is more than double that of the state and nation. Fitch expects that these vulnerabilities will continue to pressure the economy in the near-to-medium term.
MANAGEABLE LONG-TERM LIABILITIES
The district's debt burden is mixed with overall debt per capita below average at \\$1,971 and overall debt to full value elevated at 6.8%. Direct debt levels should decline given rapid amortization (94% retired in 10 years) and the lack of borrowing plans. The district recently completed a major \\$628 million capital program that replaced or remodeled 26 schools.
The district contributes to the School Employees Retirement System (SERS) and the State Teachers Retirement System (STRS) to fund both pension and other post-employment benefits (OPEB). Both plans are cost-sharing, multiple-employer defined benefit plans with weak funded ratios. Based on a 7% rate of return, Fitch-estimated system-wide funded ratios were 60.3% for SERS at June 30, 2013 and 64% for STRS at June 30, 2014. The district consistently contributes 100% of its statutorily required payments to both plans, which is lower than the actuarially required contribution. Fitch considers carrying costs to be moderate with debt service, pension and OPEB comprising 10.2% of government funds spending.
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